The dollar continued to shrink in market share last year, maintaining its status as the world’s dominant currency, yet it failed to bolster the euro as a viable alternative. According to a report from the European Central Bank (ECB), smaller competitors and gold have gained market advantage instead of the euro, which aims to step in where confidence in the dollar has waned. Since April, investors began to offload dollar assets due to unpredictable U.S. economic policies, prompting ECB President Christine Lagarde to suggest that the euro could present itself as an alternative, should the Eurozone proceed with necessary integration initiatives.
Despite these hopes, pre-existing data indicates that the euro is not gaining popularity. In 2024 alone, the dollar’s share of global foreign exchange holdings fell by 2 percentage points. The euro saw minimal gains, while the Japanese yen and Canadian dollar emerged as significant beneficiaries, as reported by the ECB.
While the dollar still commands a 58% market share in global foreign exchange reserves, this represents a 10 percentage point decline over the last decade. In contrast, the euro’s share remains just under 20%. Gold also showed remarkable performance last year, with central banks increasing their stockpile by over 1,000 tonnes—a record pace that is double the annual level observed in the previous decade.
Two-thirds of central banks reported investing in gold for diversification purposes, while two-fifths did so as a hedge against geopolitical risks. As a result, gold accounted for 20% of total foreign reserves, surpassing the euro’s share of 16%. Signs suggest the euro may be gaining some traction since April, with U.S. yields rising and the dollar weakening against the euro in an unusual correlation.
This trend indicates investor skepticism about the dollar’s status as the premier global asset and raises concerns regarding the sustainability of U.S. debt, given current fiscal policies. There has also been a noticeable trend of U.S. firms issuing debt in euros, also known as reverse Yankee Bonds, contributing to the euro’s increased share in foreign currency-denominated bond issuance. However, economists caution that the Eurozone still lacks essential financial infrastructure to meaningfully challenge the dollar.
The absence of a large-scale, liquid safe asset, coupled with fragmented debt markets and an incomplete capital market union, poses significant obstacles. Furthermore, insufficient military defense capabilities may hinder Europe’s ability to offer the geopolitical assurances that reserve managers prioritize.